SA heading for a debt crisis?
PRINTING MORE MONEY WON’T SOLVE THE PROBLEM
State-owned entities must urgently be placed under prudent financial management.
SA is facing financial hurdles, not least SOEs’ financial demands on government. The release of March 2017 SOE financial results has been painfully slow. But the financial status of those released show reliance on government guarantees and bailouts to stay in business.
If these aren’t brought under control, SA could be dragged to the edge of a financial cliff.
An overriding concern is government’s US dollar-denominated gross external debt, which at June, was $58.8 billion. Public corporation foreign debt ($20.4 billion), should be included as it’s governmentguaranteed. At a R13.39 exchange rate, this amounts to R1.1 trillion. Total external debt is $152.8 billion (R2 trillion). Foreign direct investment of $1.9 billion pales in comparison.
Servicing SA’s rand-denominated debt becomes more expensive with every downgrade: higher yields must be paid on bonds to compensate for default risk.
The government debt to gross domestic product (GDP) ratio, an economic health indicator, was 51.7% in 2016 (2008: 27.8%). If this trend continues upward, it’ll be adversely noted by rating agencies. Exchange rate weakening will make the cost of servicing foreign debt more expensive.
Can printing more money solve the debt problem?
As SA’s not a self-contained, fully-sufficient bubble, and is heavily reliant on foreign debt, printing more rands will merely devalue the currency.
SA’s a developing economy, trying to create jobs, encourage economic empowerment, attract foreign investment, fund new infrastructure, stimulate growth, and keep inflation in check. It requires ongoing funding to service its current debt and finance future infrastructure projects. SOEs must urgently be placed under prudent financial management as government can no longer afford to bail them out.
As long as funding can be sourced from abroad, SA won’t run out of money. However, the rising cost of servicing this debt will leave little to spend internally.
There are clear danger signals ahead: unemployment currently at 27.7% and rising; arresting the falling growth rate in the current economic climate is a pipe dream; a further downgrade will firmly sink SA into junk grade status and international financial institutions will be mandated to pull out of the SA bond market; a depreciating rand will make foreign debt more expensive; and SOEs can’t service their debt, and require further funding to keep afloat.
Solutions
Rating agencies will take a close look at SA’s growth rate, rise in debt, monetary policy, and political turbulence. T he rise in debt is the one factor that can be influenced. It’s therefore imperative some of the worst-performing SOEs be auctioned off – starting with SAA, Alexkor and Denel. None of these are crucial to the economy; they’re debt ridden, and require further cash injections to survive.
Instead of desperately trying to increase taxation, there should be an evaluation of tax incentives in the Income Tax Act, with their cost weighed against what’s been achieved.
Source of statistics: Trading Economics and SARB